• Bank Negara Malaysia’s (BNM) international reserves stood at US$102.8 billion as at May 15, 2019 from US$103.4 billion at April 30, 2019 • Tekun Nasional has channelled business financing worth RM140 million since the beginning of this year until April 30, 2019 • Malaysia's labour productivity grows 2.4 per cent in Q1 2019 • Malaysia's CPI rose 0.2 per cent in April 2019 to 121.1 compared to 120.9 in the same month of the preceding year: Department of Statistics Malaysia

China’s love of a fiery grain liquor made Kweichow Moutai Co Ltd the world’s most valuable alcohol distiller, and the company’s approach has been to milk that demand for all it’s worth.

But now a change in leadership is bringing a U-turn in Moutai’s strategy. Li Baofang, the new chairman of parent Kweichow Moutai Group, is rolling back the efforts of his predecessor, Yuan Renguo, who quietly departed the company last May after 18 years at the helm and was removed on Sunday from a key political position in the company’s home province.

Yuan’s solution is to diversify and trade off the Moutai name

Li is seeking to re-focus the Moutai Group back on its cash cow: The Shanghai-listed arm that sells an ultra-premium line of baijiu — China’s national drink — embraced by the elite and increasingly coveted by the country’s rising middle class.

A customisation business is being halted, and subsidiaries that make alcohol for nonpremium brands are being shut down to channel production resources to the listed arm, according to people familiar with the matter.

The parent group is also trying to sell directly to customers through the establishment of its own sales office, while cutting down the listed company’s 3,000-strong network of distributors.

Suspicion a system of kickbacks had developed between liquor distributors and some of these units helped trigger the shift, say the people, who didn’t want to be identified discussing internal company matters.

The changes are creating a stir among investors. The Shanghai Stock Exchange has asked the company’s controlling shareholder to explain the reason for setting up a new direct sales company, along with its business model and plans, according to a company filing on May 7.

Moutai’s stock has lost as much as 12% this week amid concerns the new structure shifts power and sales to the parent group, away from the listed body. The shares fell 0.6% last Wednesday amid the global market sell-off.

Baijiu King
Moutai’s Feitian, or Flying Fairy in English, is the king of China’s baijius. Made with local stream water and fermented sorghum in a mountain village in the nation’s south, production hasn’t been able to keep up with demand. While that’s added to the liquor’s cachet, it’s put the company in a challenging position when it comes to growth. Moutai can’t just hike prices because of government restrictions on the cost of high-end alcohol in China.

Former chairman Yuan’s solution was to diversify and trade off the Moutai name. Used by Mao Zedong to toast the founding of the People’s Republic in 1949, Feitian and the ultrapremium baijiu lines run by the company’s Shanghai-listed arm are a must-have symbol of wealth and power on the banquet tables of China.

Moutai’s Feitian baijiu bottled at their factory in the town of Maotai

Yuan sought to grow the customisation business, which made HK$6,000 (RM3,180) bottles of personalised Feitian for gambling junket operators in Macau, the world’s biggest casino hub and a magnet for China’s biggest spenders. The company introduced a raft of brands and sub-brands separate to the premium lines and Yuan also had plans for a less-expensive line of baijiu, which means white liquor, named Xijiu.

But the new guard — Li took over last May — has shut down subsidiaries, including one called Baijin Liquor, diverting some of their production lines to Moutai’s core brands and leaving hundreds of workers idle, according to the people.

Kweichow Moutai has more than doubled in value over the past two years, after leapfrogging Diageo plc — the maker of Johnnie Walker whiskey and Smirnoff vodka — in 2017. Thanks to soaring demand for Feitian, Moutai’s gross profit margin has held around 90% for more than a decade, and the listed arm contributed 78% of the wider group’s revenue of 40.8 billion yuan (RM24.89 billion) in 2014. That’s expected to rise to 86% of the projected 100 billion yuan in sales this year.

The brand cull was aimed at protecting that flank. Some subsidiaries were causing “serious and negative impact to Moutai’s reputation”, according to an internal company document from February announcing the shutdowns seen by Bloomberg and verified by people familiar with the company’s activities.

Image Concerns
Moutai suspects distributors were paying kickbacks for the right to operate and distribute those subsidiary brands, tarnishing the company’s image, the people said.

A company representative didn’t respond to requests for comment.

Li is trying to streamline the alcohol giant as smaller rivals like Wuliangye Yibin Co Ltd muscle in on the baijiu trade and Chinese consumer demand ebbs amid a slowing economy.

Moutai cut more than 400 of its 3,000 distributors throughout China in recent months, according to its annual report published in March. For the first time, the company is signing contracts directly with retailers, issuing a tender last month for six supermarkets to carry its stock. This week it announced the opening of a new in-house unit that will sell Feitian and other core brands directly to customers, bypassing distributors.

The shift is designed to boost margins, but is also a way of cleaning up the distribution network, the people said.

Other Plans
One of the consequences has been a spike in prices in the retail market as distributors hoard inventory on concern they’ll be terminated next, according to people involved in the sales network who didn’t want to be identified. A 500ml (16.9oz) bottle of Feitian on Chinese e-commerce platform T-mall, currently costs in excess of 2,000 yuan, more than double Moutai’s factory-gate price set in late 2017 — the last time it was increased.

In an interview with Bloomberg in late 2017, Yuan detailed his strategy for pushing Moutai forward. He also planned to set up insurance and asset management businesses and was weighing publ ic list ings of Moutai’s e-commerce platform, an agricultural unit and the subsidiary selling Xijiu by 2020.

Those plans haven’t been mentioned by Moutai since Yuan was replaced almost a year ago. His removal from Guizhou province’s political consultative body this week, according to state-run media, could be another sign Yuan’s legacy is being unwound. — Bloomberg